FORBES Magazine March 22, 1999
Currency crises and the rewriting of history
By Steve H. Hanke
SOMEDAY Treasury Secretary Robert Rubin just may come through on his threats to resign. The Clinton Administration would probably like to install his deputy, Lawrence Summers, as successor. To make this scheme work, the Administration has to paint both Rubin and Summers as saviors of the world financial system. And so Washington is busy rewriting history.
Rubin and Summers have concocted a tale about the financial crises that have racked Asia, Russia and Brazil, and prestigious elements of the media have fallen for it. The New York Times published a four-part series of this revisionist financial history during the week of Feb. 14.
Here is the story line: No one forecast the Asian crisis. And after currency chaos engulfed Asia, no one anticipated that the contagion would spread to Russia and then to Brazil. Rubin and Summers came to the rescue with an endorsement of International Monetary Fund moves to devalue currencies and impose austerity. The story ends with a chapter asserting how much worse the crises would have been were it not for Rubin, Summers and Alan Greenspan. Time magazine's cover story of Feb. 15 went so far as to dub these three amigos "The Committee to Save the World."
Balderdash! Plenty of people could see that a Third World currency crisis would spread.
Robert Rubin has concocted a tale about the currency crises, and prestigious elements of the media have fallen for it.
Starting with my column of Aug. 11, 1997, I have written 14 FORBES articles and participated in two FORBES Q and A interviews in which I explained the Asian financial crisis and how it would spread like a prairie fire to Russia and Brazil. My Oct. 20, 1997 column concluded that Brazil's fatally flawed currency setup would be defended at all cost until the October 1998 presidential elections, after which the real would fall apart. My Mar. 9, 1998 piece anticipated that Russia would virtually run out of foreign reserves by the end of June and that the ruble would collapse not long after.
We will never know with scientific certainty about the effect the Rubin-Summers therapeutics had on the crises. However, the IMF admitted in a January report, "IMF-Supported Programs in Indonesia, Korea and Thailand: A Preliminary Assessment," that mistakes were made. P.G. Wodehouse's character Ukridge comes closer to my own assessment of the probability that IMF-style therapy could be successful: "about as much chance as a one-armed blind man in a dark room trying to shove a pound of melted butter into a wild cat's left ear with a red-hot needle."
And what about the Rubin-Summers claim that they have been serving up free-market solutions? Their free-market vision is a central bank that produces a national currency. If only central bankers would follow the advice emanating from the wags in Washington, they could produce sound money that would rid the world of the volatile hot-money flows that have plagued the emerging markets for the past two years.
Like the rest of the Rubin-Summers spin, their embrace of free-market economics rings hollow. Friedrich von Hayek was a true free-market economist. In his 1976 book, Choice in Currency: A Way to Stop Inflation, this Nobelist concluded that the discretionary monetary policies followed by central banks were a type of central planning with the same disadvantages as, say, the central planning of agricultural production. Hayek favored a competitive currency regime in which private parties would be free to use any currencies they wished, whether they were issued by government-owned central banks or private banks.
Not everyone is listening to Rubin and Summers. In January President Carlos Menem suggested that Argentina dump its central bank and stop issuing pesos while making all other currencies legal tender in Argentina. Such a competitive currency regime would eliminate currency risk, reduce interest rates and stimulate economic growth. Let's hope Menem succeeds and that others follow his lead. That would make the world less safe for central planners but safer for the rest of us.
Steve H. Hanke is a professor of Applied Economics at The Johns Hopkins University in Baltimore.
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